State averts cash crisis for now
October 17, 2008
SACRAMENTO Gov. Arnold Schwarzenegger declared California’s brisk sale of short-term notes as “a vote of confidence” that will help the state avoid a cash crisis at the end of the month.Sales were going so well that the state Treasurer’s Office decided Wednesday to increase the state’s offering to $4.5 billion from $4 billion, as investors willingly picked up government notes in an uncertain financial market. As of late Wednesday, individual orders totaled about $3.9 billion and the state will offer the notes to institutional investors Thursday.”These are good, safe investments that will help protect vital services in California and I’m thrilled to see so many people have taken advantage of this valuable investment,” Schwarzenegger said in a statement.California is offering to pay lenders back with interest next year so it can raise enough cash now to pay for operating expenses until taxes come in the spring. Without the sale, the state would have run out of cash at the end of this month.The state will have to conduct a second round of borrowing soon. The state needs a total of $7 billion to pay for operating expenses until tax revenues come in the spring.While it looks like California will be able to borrow enough cash to get through the new year, the governor and lawmakers still haven’t addressed the state’s bad habit of spending more money than it generates in taxes each year. The state is projected to spend about $6 billion more than it takes in next fiscal year.Budget analysts are especially concerned that Wall Street’s wild fluctuations and the state’s high unemployment rate of 7.7 percent will result in even less revenues, putting the state into further strain.On Wednesday, California’s latest revenue figures showed it was down $1 billion below projections for the first quarter of the 2008-09 fiscal year, which fell in line with earlier forecasts that the state will be off the mark by over $4 billion for the year.”One of the ongoing concerns is the state’s structural deficit. They’ve had one for years,” said David Hitchcock, a senior director at Standard andamp; Poor’s credit rating agency, which assigned a negative watch to the state’s bonds last week. He said the state’s current plan to borrow against future lottery revenues would only provide short-term relief.In recent weeks, Schwarzenegger and legislative leaders have been focused on getting through the short-term cash crisis. The governor warned that the state will run out of cash at end of the month because the frozen credit market could prevent the state from accessing routine borrowing.Schwarzenegger at one point sent a letter to U.S. Treasury Secretary Henry Paulson asking the federal government to assist California should it not be able to secure loans.While the market remains volatile, the outlook for borrowing began to change after the federal government approved a $700 billion Wall Street bailout and lowered interest rates. When state Treasurer Bill Lockyer issued $4 billion in short-term notes this week, Schwarzenegger went on the airwaves to promote the sale and invested $100,000 of his own money.By Wednesday afternoon, the state sold 85 percent of the notes to individual investors, prompting the Treasurer’s Office to increase the sale to $4.5 billion. While it’s not clear how much it will cost taxpayers to borrow these loans, brisk sales allowed the state to reduce projected interest rates.Still, the governor and lawmakers still face pressing budget concerns.Emily Raimes, an analyst at Moody’s Investor Service, said the worst thing elected officials could do is what they did over the summer: borrow billions from other funds in the face of a $15.2 billion deficit for the fiscal year that began in July.Saddled with low cash reserves and the longest budget fight in California’s legislative history, the state changed the rules for internal borrowing so it could tap $4.5 billion from special funds dedicated to treat mental illness, promote early childhood learning and help pay for AIDS drugs, among others. Without the changes, the state would not have been able to pay its bills between the time the budget passed Sept. 23 and this week’s sale.”They could do a continuation of what they have been doing for the past year, these one-time gimmicks and one-time revenues,” Raimes said. “I don’t know what they’ll do or what they’ll come up with, but what they did do to get through the … deficit did not leave them well positioned for next year.”Hitchcock, the Sandamp;P analyst, said California’s two-thirds vote requirement for passing budgets continues to promote partisan fights. Also, the state’s tax structuremainly sales, corporate and personal income taxis particularly sensitive to losses on Wall Street.According to the state’s Franchise Tax Board, the top 1 percent of California earners paid 48 percent of the state’s income taxes, much of that in the form of capital gains. In boom times, the system has a tendency to inflate state revenues, such as during the height of the tech bubble in 2000.”You wouldn’t expect a state with 37 million people would be affected by a few individuals but there is some sensitivity there,” Hitchcock said.The Schwarzenegger administration has lowered personal income tax collections by $1.5 billion, sales tax by $1 billion and corporate tax by $1 billion for the 2008-09 fiscal year. Combined with other adjustments, the state projected a total downward adjustment of $4.3 billion.Schwarzenegger and lawmakers hope to fill some of that shortfall by borrowing $10 billion from future lottery revenues over the next two budget cycles. However, analysts said the other states that securitize their lotteryFlorida, West Virginia and Oregonuse proceeds for brick and mortar projects, not deficit financing.